UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Transition Period From to
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Commission file number 000-23377
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INTERVEST BANCSHARES CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 13-3699013
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
ONE ROCKEFELLER PLAZA, SUITE 400
NEW YORK, NEW YORK 10020-2002
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(Address of principal executive offices) (Zip Code)
(212) 218-2800
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
YES XX NO .
-- --
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a nonaccelerated filer (as defined in Rule 12b-2 of the
Exchange Act). Check one:
Large accelerated filer Accelerated filer Nonaccelerated filer XX
-- -- --
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act):
YES NO XX.
-- --
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Title of Each Class: Shares Outstanding:
- -------------------- -------------------
Class A Common Stock, $1.00 par value per share 7,457,302 outstanding as of April 28, 2006
- ----------------------------------------------- ------------------------------------------
Class B Common Stock, $1.00 par value per share 385,000 outstanding as of April 28, 2006
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INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
FORM 10-Q
MARCH 31, 2006
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
----
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
as of March 31, 2006 (Unaudited) and December 31, 2005 . . . . . . . . . . . . 3
Condensed Consolidated Statements of Earnings (Unaudited)
for the Quarters Ended March 31, 2006 and 2005 . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
for the Quarters Ended March 31, 2006 and 2005 . . . . . . . . . . . . . . . . 5
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Quarters Ended March 31, 2006 and 2005 . . . . . . . . . . . . . . . . 6
Notes to Condensed Consolidated Financial Statements (Unaudited) . . . . . . . . 7
Review by Independent Registered Public Accounting Firm. . . . . . . . . . . . . 17
Report of Independent Registered Public Accounting Firm. . . . . . . . . . . . . 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . 19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. . . . . . . . 30
ITEM 4. CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . 30
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
ITEM 1A. RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS . . . . . . . 30
ITEM 3. DEFAULTS UPON SENIOR SECURITIES . . . . . . . . . . . . . . . . . . . . . 30
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . . . . 30
ITEM 5. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
ITEM 6. EXHIBITS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
Intervest Bancshares Corporation and subsidiaries (the "Company") is making this
statement in order to satisfy the "Safe Harbor" provision contained in the
Private Securities Litigation Reform Act of 1995. The statements contained in
this report on Form 10-Q that are not statements of historical fact may include
forward-looking statements that involve a number of risks and uncertainties.
Such forward-looking statements are made based on management's expectations and
beliefs concerning future events impacting the Company and are subject to
uncertainties and factors relating to the Company's operations and economic
environment, all of which are difficult to predict and many of which are beyond
the control of the Company, that could cause actual results of the Company to
differ materially from those matters expressed in or implied by forward-looking
statements.
2
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
($in thousands, except par value) 2006 2005
- ----------------------------------------------------------------------------------------------------------------------------
ASSETS (Unaudited) (Audited)
Cash and due from banks $ 8,698 $ 11,595
Federal funds sold 16,022 42,675
Commercial paper and other short-term investments 3,111 2,446
----------------------------
Total cash and cash equivalents 27,831 56,716
Securities held to maturity, net (estimated fair value of $325,290 and $249,088, respectively) 327,974 251,508
Federal Reserve Bank and Federal Home Loan Bank stock, at cost 6,299 5,241
Loans receivable (net of allowance for loan losses of $15,542 and $15,181, respectively) 1,386,466 1,352,805
Accrued interest receivable 9,066 7,706
Loan fees receivable 11,229 10,941
Premises and equipment, net 6,347 6,421
Deferred income tax asset 7,208 6,988
Deferred debenture offering costs, net 5,327 5,610
Other assets 2,777 2,487
============================================================================================================================
TOTAL ASSETS $ 1,790,524 $ 1,706,423
============================================================================================================================
LIABILITIES
Deposits:
Noninterest-bearing demand deposit accounts $ 6,484 $ 9,188
Interest-bearing deposit accounts:
Checking (NOW) accounts 8,903 7,202
Savings accounts 15,913 17,351
Money market accounts 246,431 223,075
Certificate of deposit accounts 1,151,950 1,118,514
----------------------------
Total deposit accounts 1,429,681 1,375,330
Borrowed Funds:
Federal Home Loan Bank advances 23,500 -
Subordinated debentures 86,000 87,390
Subordinated debentures - capital securities 61,856 61,856
Accrued interest payable on all borrowed funds 6,898 6,250
Mortgage note payable 226 229
----------------------------
Total borrowed funds 178,480 155,725
Accrued interest payable on deposits 3,665 3,232
Mortgage escrow funds payable 25,830 20,302
Official checks outstanding 2,900 11,689
Other liabilities 7,140 3,967
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TOTAL LIABILITIES 1,647,696 1,570,245
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STOCKHOLDERS' EQUITY
Preferred stock (300,000 shares authorized, none issued) - -
Class A common stock ($1.00 par value, 9,500,000 shares authorized,
7,452,642 and 7,438,058 shares issued and outstanding, respectively) 7,453 7,438
Class B common stock ($1.00 par value, 700,000 shares authorized,
385,000 shares issued and outstanding) 385 385
Additional paid-in-capital, common 65,524 65,309
Retained earnings 69,466 63,046
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 142,828 136,178
============================================================================================================================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,790,524 $ 1,706,423
============================================================================================================================
<FN>
See accompanying notes to condensed consolidated financial statements.
3
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
QUARTER ENDED
MARCH 31,
-----------------------
($in thousands, except per share data) 2006 2005
- ------------------------------------------------------------------------------------------
INTEREST AND DIVIDEND INCOME
Loans receivable $ 26,931 $ 18,811
Securities 2,747 1,563
Other interest-earning assets 388 194
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TOTAL INTEREST AND DIVIDEND INCOME 30,066 20,568
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INTEREST EXPENSE
Deposits 14,559 9,039
Subordinated debentures 1,908 2,060
Subordinated debentures - capital securities 1,090 1,090
Other borrowed funds 23 94
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TOTAL INTEREST EXPENSE 17,580 12,283
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NET INTEREST AND DIVIDEND INCOME 12,486 8,285
Provision for loan losses 361 1,033
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NET INTEREST AND DIVIDEND INCOME AFTER PROVISION FOR LOAN LOSSES 12,125 7,252
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NONINTEREST INCOME
Customer service fees 159 76
Income from mortgage lending activities 249 149
Income from the early repayment of mortgage loans 1,674 654
Loss from early call of investment securities - (1)
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TOTAL NONINTEREST INCOME 2,082 878
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NONINTEREST EXPENSES
Salaries and employee benefits 1,459 1,285
Occupancy and equipment, net 403 357
Data processing 178 136
Professional fees and services 225 139
Stationery, printing and supplies 53 54
Postage and delivery 41 33
FDIC and general insurance 88 79
Director and committee fees 122 122
Advertising and promotion 72 47
All other 155 122
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TOTAL NONINTEREST EXPENSES 2,796 2,374
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Earnings before income taxes 11,411 5,756
Provision for income taxes 4,991 2,508
==========================================================================================
NET EARNINGS $ 6,420 $ 3,248
==========================================================================================
BASIC EARNINGS PER SHARE $ 0.82 $ 0 .52
DILUTED EARNINGS PER SHARE $ 0.77 $ 0 .48
CASH DIVIDENDS PER SHARE $ - $ -
- ------------------------------------------------------------------------------------------
<FN>
See accompanying notes to condensed consolidated financial statements.
4
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
QUARTER ENDED
MARCH 31,
---------------------------------------
2006 2005
---------------------------------------
($thousands) SHARES AMOUNT SHARES AMOUNT
- ----------------------------------------------------------------------------------------------
CLASS A COMMON STOCK
Balance at beginning of period 7,438,058 $ 7,438 5,886,433 $ 5,886
Issuance of shares upon the conversion of debentures 14,584 15 2,410 3
- ----------------------------------------------------------------------------------------------
Balance at end of period 7,452,642 7,453 5,888,843 5,889
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CLASS B COMMON STOCK
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Balance at beginning and end of period 385,000 385 385,000 385
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ADDITIONAL PAID-IN-CAPITAL, COMMON
Balance at beginning of period 65,309 38,961
Issuance of shares upon the conversion of debentures 215 31
- ----------------------------------------------------------------------------------------------
Balance at end of period 65,524 38,992
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RETAINED EARNINGS
Balance at beginning of period 63,046 44,862
Net earnings for the period 6,420 3,248
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Balance at end of period 69,466 48,110
- ----------------------------------------------------------------------------------------------
==============================================================================================
TOTAL STOCKHOLDERS' EQUITY AT END OF PERIOD 7,837,642 $142,828 6,273,843 $93,376
==============================================================================================
<FN>
See accompanying notes to condensed consolidated financial statements.
5
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
QUARTER ENDED
MARCH 31,
----------------------
($in thousands) 2006 2005
- --------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings $ 6,420 $ 3,248
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation and amortization 136 129
Provision for loan losses 361 1,033
Deferred income tax benefit (220) (452)
Amortization of deferred debenture offering costs 284 296
Amortization of premiums (accretion) of discounts and deferred loan fees, net (2,752) (1,499)
Net increase (decrease) in accrued interest payable on debentures 722 (1,032)
Net decrease in official checks outstanding (8,789) (5,483)
Net increase in loan fees receivable (288) (524)
Net change in all other assets and liabilities 3,857 3,718
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NET CASH USED IN OPERATING ACTIVITIES (269) (566)
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INVESTING ACTIVITIES
Maturities and calls of securities held to maturity 29,050 19,305
Purchases of securities held to maturity (105,449) (25,523)
Net increase in loans receivable (33,219) (79,896)
Purchases of Federal Reserve Bank and Federal Home Loan Bank stock, net (1,058) -
Purchases of premises and equipment, net (62) (103)
- --------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (110,738) (86,217)
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FINANCING ACTIVITIES
Net increase in deposits 54,351 129,785
Net increase in mortgage escrow funds payable 5,528 5,381
Net increase (decrease) in FHLB advances 23,500 (21,000)
Principal repayments of debentures and mortgage note payable (1,253) (2,603)
Debenture issuance costs (4) (32)
- --------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 82,122 111,531
- --------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (28,885) 24,748
Cash and cash equivalents at beginning of period 56,716 24,599
========================================================================================================
Cash and cash equivalents at end of period $ 27,831 $ 49,347
========================================================================================================
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest $ 16,122 $ 12,606
Income taxes 2,956 871
Noncash activities:
Conversion of debentures and accrued interest into Class A common stock 230 34
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<FN>
See accompanying notes to condensed consolidated financial statements.
6
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 1 - PRINCIPLES OF CONSOLIDATION, BASIS OF PRESENTATION AND USE OF ESTIMATES
The condensed consolidated financial statements of Intervest Bancshares
Corporation and Subsidiaries in this report have not been audited except for
information derived from the 2005 audited consolidated financial statements and
notes thereto. The condensed consolidated financial statements in this report
should be read in conjunction with the 2005 audited consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 2005.
The consolidated financial statements include the accounts of Intervest
Bancshares Corporation (a registered financial holding company referred to by
itself as the "Holding Company") and its three wholly owned subsidiaries,
Intervest National Bank (referred to as the "Bank"), Intervest Mortgage
Corporation and Intervest Securities Corporation. All the entities are referred
to collectively as the "Company" on a consolidated basis. All significant
intercompany balances and transactions have been eliminated in consolidation.
Intervest Statutory Trust I, II, III and IV are wholly owned subsidiaries of the
Holding Company that are unconsolidated entities as required by Financial
Accounting Standards Board (FASB) Interpretation No. 46-R, "Consolidation of
Variable Interest Entities." The accounting and reporting policies of the
Company conform to United States generally accepted accounting principles and to
general practices within the banking industry.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets,
liabilities and disclosure of contingent liabilities as of the date of the
consolidated financial statements, and revenues and expenses during the
reporting periods. Actual results could differ from those estimates. Estimates
that are particularly susceptible to significant change relate to the
determination of the allowance for loan losses and the estimated fair values of
financial instruments. In the opinion of management, all material adjustments
necessary for a fair presentation of financial condition and results of
operations for the interim periods presented in this report have been made.
These adjustments are of a normal recurring nature. The results of operations
for the interim periods are not necessarily indicative of results that may be
expected for the entire year or any other interim period.
NOTE 2 - DESCRIPTION OF BUSINESS
The offices of the Holding Company, Intervest Mortgage Corporation, Intervest
Securities Corporation and the Bank's headquarters and full-service banking
office are located on the entire fourth floor of One Rockefeller Plaza in New
York City, New York, 10020-2002, and the main telephone number is 212-218-2800.
The Holding Company's primary business is the ownership and operation of its
subsidiaries. It does not engage in any other substantial business activities
other than a limited amount of real estate mortgage lending, including the
participation in loans originated by the Bank. From time to time, the Holding
Company also issues debt and equity securities to raise funds for working
capital purposes.
The Company's primary business segment is banking and real estate lending. The
Company's lending activities are comprised almost entirely of origination for
its loan portfolio, mortgage loans secured by commercial and multifamily real
estate properties (including rental and cooperative/condominium apartment
buildings, office buildings, mixed-use properties, shopping centers, hotels,
restaurants, industrial properties, parking lots/garages and vacant land). These
loans have an average life of approximately three years. The Company tends to
lend in areas that are in the process of being revitalized, with a concentration
of loans on properties located in New York State and the State of Florida. A
significant portion of the residential properties are located in New York City
and are subject to rent control and rent stabilization laws, which limit the
ability of the property owners to increase rents.
The Bank is a nationally chartered, full-service commercial bank that has its
headquarters and full-service banking office in Rockefeller Plaza in New York
City, and a total of five full-service banking offices in Pinellas County,
Florida - four in Clearwater and one in South Pasadena. The Bank has received
regulatory permission to open an additional branch office in Clearwater Beach,
Florida, which is expected to open by August 1, 2006. The Bank conducts a
personalized commercial and consumer banking business and attracts deposits from
the areas served by its banking offices. The Bank also provides internet banking
services through its web site: www.intervestnatbank.com, which can attract
deposit customers from outside its primary market areas. The deposits, together
with funds derived from other sources, are mainly used to originate mortgage
loans secured by commercial and multifamily real estate properties and to
purchase investment securities. The information on the aforementioned web site
is not and should not be considered part of this report and is not incorporated
by reference.
7
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 2 - DESCRIPTION OF BUSINESS - CONTINUED
Intervest Mortgage Corporation's business focuses on the origination of first
mortgage and junior mortgage loans secured by commercial and multifamily real
estate properties. It also provides loan origination services to the Bank.
Intervest Mortgage Corporation funds its lending business through the issuance
of subordinated debentures in public offerings. It currently has one active
wholly owned subsidiary, Intervest Realty Servicing Corporation, which is
engaged in certain mortgage servicing activities.
Intervest Securities Corporation is a broker/dealer and a member of the National
Association of Securities Dealers (NASD) whose business activities to date have
not been material. Its only revenues have been derived from participating as a
selected dealer from time to time in offerings of debt securities of the
Company, primarily those of Intervest Mortgage Corporation.
Intervest Statutory Trust I, II, III and IV issued in December 2001, September
2003, March 2004 and September 2004, $15 million, respectively, of trust
preferred securities for a total of $60 million. Each trust was formed for the
sole purpose of issuing and administering the trust preferred securities and
they do not conduct any trade or business. For a further discussion, see note 8
herein.
NOTE 3 - SECURITIES
The carrying value (amortized cost) and estimated fair value of securities held
to maturity are as follows:
Gross Gross Estimated Wtd-Avg
Amortized Unrealized Unrealized Fair Wtd-Avg Remaining
($in thousands) Cost Gains Losses Value Yield Maturity
- --------------------------------------------------------------------------------------------
At March 31, 2006 $ 327,974 $ 3 $ 2,687 $ 325,290 3.88% 1.4 Years
At December 31, 2005 $ 251,508 $ 14 $ 2,434 $ 249,088 3.26% 1.1 Years
- --------------------------------------------------------------------------------------------
All the securities at March 31, 2006 and December 31, 2005 were debt obligations
of U.S. government corporations or sponsored agencies (such as FHLB, FNMA, FHLMC
or FFCB) and were held by the Bank. The securities have fixed rates or have
predetermined scheduled rate increases, and some have call features that allow
the issuer to call the security at par before its stated maturity without
penalty.
At March 31, 2006, the portfolio consisted of 201 securities nearly all of which
had an unrealized loss. A large portion of the unrealized losses were for a
continuous period of more than 12 months. Management believes that the cause of
these unrealized losses is directly related to changes in market interest rates.
In general, as interest rates rise, the fair value of fixed rate securities will
decrease; as interest rates fall, their fair value will increase.
Management views the unrealized losses noted above to be temporary based on the
impact of interest rates, the very short maturities of the investments and their
high credit quality. In addition, the Bank has the ability and intent to hold
its investments for a period of time sufficient for the fair value of the
securities to recover. To date, the Bank has always recovered the cost of its
investment securities upon maturity. Management evaluates securities for
other-than-temporary impairment at least on a quarterly basis, and more
frequently when economic or market concerns warrant such evaluation.
The amortized cost and estimated fair value of securities held to maturity by
remaining term to contractual maturity is as follows:
($in thousands) Amortized Cost Estimated Fair Value Average Yield
----------------------------------------------------------------------------------------------
At March 31, 2006:
Due in one year or less $ 122,904 $ 121,885 3.05%
Due after one year through five years 205,070 203,405 4.39%
----------------------------------------------------------------------------------------------
$ 327,974 $ 325,290 3.88%
----------------------------------------------------------------------------------------------
($in thousands) Amortized Cost Estimated Fair Value Average Yield
----------------------------------------------------------------------------------------------
At December 31, 2005:
Due in one year or less $ 124,413 $ 123,345 2.71%
Due after one year through five years 127,095 125,743 3.79%
----------------------------------------------------------------------------------------------
$ 251,508 $ 249,088 3.26%
----------------------------------------------------------------------------------------------
There were no securities classified as available for sale or any sales of
securities during the reporting periods.
8
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 4 - LOANS RECEIVABLE
Loans receivable are summarized as follows:
At March 31, 2006 At December 31, 2005
------------------------ ------------------------
($in thousands) # of Loans Amount # of Loans Amount
-------------------------------------------------------------------------------------------
Commercial real estate loans 273 $ 753,792 264 $ 735,650
Residential multifamily loans 234 568,042 234 538,760
Land development and other land loans 33 90,886 31 105,251
Residential 1-4 family loans 3 100 3 100
Commercial business loans 22 1,139 22 1,089
Consumer loans 14 304 10 194
-------------------------------------------------------------------------------------------
Loans receivable 579 1,414,263 564 1,381,044
-------------------------------------------------------------------------------------------
Deferred loan fees (12,255) (13,058)
-------------------------------------------------------------------------------------------
Loans receivable, net of deferred fees 1,402,008 1,367,986
-------------------------------------------------------------------------------------------
Allowance for loan losses (15,542) (15,181)
-------------------------------------------------------------------------------------------
Loans receivable, net $ 1,386,466 $ 1,352,805
-------------------------------------------------------------------------------------------
At March 31, 2006, there were three multifamily real estate loans totaling $1.7
million on nonaccrual status, compared to two loans totaling $0.7 million at
December 31, 2005. Nonaccrual loans are considered impaired under the criteria
of SFAS No. 114, but no valuation allowance was maintained at any time since the
Company believes that the estimated fair value of the underlying properties
exceeded its recorded investment. At March 31, 2006 and December 31, 2005, there
were no other impaired loans.
At March 31, 2006 and December 31, 2005, there were $1.5 million and $2.6
million, respectively, of loans ninety days past due and still accruing interest
because they were deemed by management to be well secured and in the process of
collection.
Interest income that was not recorded on nonaccrual loans under their
contractual terms amounted to $51,000 for the quarter ended March 31, 2006,
compared to $104,000 for the quarter ended March 31, 2005. The average balance
of nonaccrual loans for the quarter ended March 31, 2006 and 2005 was $2.9
million and $4.6 million, respectively.
NOTE 5 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized as follows:
Quarter Ended March 31,
------------------------------
($in thousands) 2006 2005
- ----------------------------------------------------------------
Balance at beginning of period $ 15,181 $ 11,106
Provision charged to operations 361 1,033
- ----------------------------------------------------------------
Balance at end of period $ 15,542 $ 12,139
- ----------------------------------------------------------------
NOTE 6 - DEPOSITS
Scheduled maturities of certificates of deposit accounts are as follows:
At March 31, 2006 At December 31, 2005
------------------------- -------------------------
Wtd-Avg Wtd-Avg
($in thousands) Amount Stated Rate Amount Stated Rate
-------------------------------------------------------------------------------
Within one year $ 417,655 4.10% $ 381,968 3.77%
Over one to two years 275,991 4.33 259,698 4.30
Over two to three years 131,094 4.23 126,546 4.13
Over three to four years 183,675 4.51 160,344 4.43
Over four years 143,535 4.79 189,958 4.69
-------------------------------------------------------------------------------
$ 1,151,950 4.32% $ 1,118,514 4.18%
-------------------------------------------------------------------------------
Certificate of deposit accounts of $100,000 or more totaled $388.1 million and
$371.8 million at March 31, 2006 and December 31, 2005, respectively. At March
31, 2006, certificate of deposit accounts of $100,000 or more by remaining
maturity were as follows: due within one year $135.9 million; over one to two
years $104.4 million; over two to three years $37.4 million; over three to four
years $62.3 million; and over four years $48.1 million.
9
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 7 - SUBORDINATED DEBENTURES AND MORTGAGE NOTE PAYABLE
Subordinated debentures by series and mortgage note payable are summarized as
follows:
At March 31, At December 31,
($in thousands) 2006 2005
- --------------------------------------------------------------------------------------------------------------
INTERVEST MORTGAGE CORPORATION:
Series 06/28/99 - interest at 9% fixed - due July 1, 2006 $ 2,000 $ 2,000
Series 09/18/00 - interest at 9% fixed - due January 1, 2008 1,250 1,250
Series 08/01/01 - interest at 8% fixed - due April 1, 2007 2,750 2,750
Series 08/01/01 - interest at 8 1/2% fixed - due April 1, 2009 2,750 2,750
Series 01/17/02 - interest at 7 1/2% fixed - due October 1, 2007 2,250 2,250
Series 01/17/02 - interest at 7 3/4% fixed - due October 1, 2009 2,250 2,250
Series 08/05/02 - interest at 7 1/2% fixed - due January 1, 2008 3,000 3,000
Series 08/05/02 - interest at 7 3/4% fixed - due January 1, 2010 3,000 3,000
Series 01/21/03 - interest at 6 3/4% fixed - due July 1, 2006 1,500 1,500
Series 01/21/03 - interest at 7 % fixed - due July 1, 2008 3,000 3,000
Series 01/21/03 - interest at 7 1/4% fixed - due July 1, 2010 3,000 3,000
Series 07/25/03 - interest at 6 1/2% fixed - due October 1, 2006 2,500 2,500
Series 07/25/03 - interest at 6 3/4% fixed - due October 1, 2008 3,000 3,000
Series 07/25/03 - interest at 7 % fixed - due October 1, 2010 3,000 3,000
Series 11/28/03 - interest at 6 1/4% fixed - due April 1, 2007 2,000 2,000
Series 11/28/03 - interest at 6 1/2% fixed - due April 1, 2009 3,500 3,500
Series 11/28/03 - interest at 6 3/4% fixed - due April 1, 2011 4,500 4,500
Series 06/07/04 - interest at 6 1/4% fixed - due January 1, 2008 2,500 2,500
Series 06/07/04 - interest at 6 1/2% fixed - due January 1, 2010 4,000 4,000
Series 06/07/04 - interest at 6 3/4% fixed - due January 1, 2012 5,000 5,000
Series 03/21/05 - interest at 6 1/4% fixed - due April 1, 2009 3,000 3,000
Series 03/21/05 - interest at 6 1/2% fixed - due April 1, 2011 4,500 4,500
Series 03/21/05 - interest at 7% fixed - due April 1, 2013 6,500 6,500
Series 08/12/05 - interest at 6 1/4% fixed - due October 1, 2009 2,000 2,000
Series 08/12/05 - interest at 6 1/2% fixed - due October 1, 2011 4,000 4,000
Series 08/12/05 - interest at 7% fixed - due October 1, 2013 6,000 6,000
-------------------------------
82,750 82,750
INTERVEST BANCSHARES CORPORATION:
Series 05/14/98 - interest at 8% fixed - due July 1, 2008 2,000 2,140
Series 12/15/00 - interest at 8 1/2% fixed - due April 1, 2006 1,250 1,250
Series 12/15/00 - interest at 9% fixed - due April 1, 2008 - 1,250
-------------------------------
3,250 4,640
INTERVEST NATIONAL BANK:
Mortgage note payable (1) - interest at 7% fixed - due February 1, 2017 226 229
- --------------------------------------------------------------------------------------------------------------
$ 86,226 $ 87,619
- --------------------------------------------------------------------------------------------------------------
<FN>
(1) The note cannot be prepaid except during the last year of its term.
Scheduled contractual maturities as of March 31, 2006 were as follows:
($in thousands) Principal Accrued Interest
---------------------------------------------------------------------------------
For the period April 1, 2006 to December 31, 2006 $ 6,011 $ 2,872
For the year ended December 31, 2007 7,015 210
For the year ended December 31, 2008 16,016 2,294
For the year ended December 31, 2009 13,517 325
For the year ended December 31, 2010 13,019 270
Thereafter 30,648 361
---------------------------------------------------------------------------------
$ 86,226 $ 6,332
---------------------------------------------------------------------------------
10
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 7 - SUBORDINATED DEBENTURES AND MORTGAGE NOTE PAYABLE, CONTINUED
Intervest Bancshares Corporation repaid the following debentures:
- - Series 12/15/00 due 4/1/08 were repaid early on 3/1/06 for $1,250,000 of
principal and $18,000 of accrued interest;
Intervest Mortgage Corporation repaid the following debentures subsequent to
March 31, 2006:
- - Series 6/28/99 due 7/1/06 were repaid early on 5/1/06 for $2,000,000 of
principal and $1,645,000 of accrued interest;
- - Series 1/21/03 due 7/1/06 were repaid early on 5/1/06 for $1,500,000 of
principal and $34,000 of accrued interest;
Interest is paid quarterly on Intervest Mortgage Corporation's debentures except
for the following: all of Series 6/28/99 and 9/18/00; $0.6 million of Series
8/01/01; $0.2 million of Series 1/17/02; $1.1 million of Series 8/05/02; $1.8
million of Series 11/28/03; $1.9 million of Series 6/7/04; $1.9 million of
Series 3/21/05; and $1.8 million of Series 8/12/05, all of which accrue and
compound interest quarterly, with such interest due and payable at maturity.
The holders of Intervest Mortgage Corporation's Series 9/18/00 and 1/17/02
through 8/12/05 debentures can require Intervest Mortgage Corporation, on a
first come basis during a specified time, to repurchase the debentures for face
amount plus accrued interest once each year (beginning July 1, 2006 for Series
1/21/03, October 1, 2006 for Series 7/25/03, January 1, 2007 for Series
11/28/03, January 1, 2008 for Series 6/7/04, April 1, 2009 for Series 3/21/05
and October 1, 2009 for Series 8/12/05). However, in no calendar year can the
required purchases be more than $100,000 in principal amount of each maturity,
in each series of debentures, on a non-cumulative basis.
Intervest Mortgage Corporation's debentures may be redeemed at its option at any
time, in whole or in part, for face value, except for Series 3/21/05 and Series
8/12/05, which would be at a premium of 1% if they were redeemed prior to
October 1, 2006 and April 1, 2007, respectively. All the debentures are
unsecured and subordinate to all present and future senior indebtedness, as
defined in the indenture related to each debenture.
In the second quarter of 2006, Intervest Mortgage Corporation anticipates
completing a public offering of up to $16 million in aggregate principal amount
of additional debentures
The Holding Company's Series 5/14/98 subordinated debentures are convertible
along with accrued interest at the option of the holders at any time prior to
April 1, 2008 into shares of its Class A common stock at the following
conversion prices per share: $16.00 in 2006; $18.00 in 2007 and $20.00 from
January 1, 2008 through April 1, 2008. The Holding Company has the right to
establish conversion prices that are less than those set forth above for such
periods as it may determine. In the first quarter of 2006, $233,000 of
debentures ($140,000 of principal and $93,000 of accrued interest) were
converted into shares of Class A common stock at $16.00 per share.
At March 31, 2006, interest accrued and compounded quarterly on $0.5 million of
the Holding Company's convertible debentures at the rate of 8% per annum, while
$1.5 million of the convertible debentures pay interest quarterly at the rate of
8% per annum. All accrued interest of $1.3 million is due and payable at
maturity whether by acceleration, redemption or otherwise. Any convertible
debenture holder may, on or before July 1 of each year, elect to be paid all
accrued interest and to thereafter receive regular quarterly payments of
interest. The Holding Company may redeem any of its debentures, in whole or in
part, at any time for face value.
NOTE 8 - SUBORDINATED DEBENTURES - CAPITAL SECURITIES
Capital Securities (commonly referred to as trust preferred securities) are
summarized as follows:
At March 31, 2006 At December 31, 2005
------------------------ ------------------------
Accrued Accrued
($in thousands) Principal Interest Principal Interest
- ---------------------------------------------------------------------------------------------------------------
Capital Securities I - debentures due December 18, 2031 $ 15,464 $ 441 $ 15,464 $ 59
Capital Securities II - debentures due September 17, 2033 15,464 41 15,464 35
Capital Securities III - debentures due March 17, 2034 15,464 36 15,464 31
Capital Securities IV - debentures due September 20, 2034 15,464 29 15,464 29
- ---------------------------------------------------------------------------------------------------------------
$ 61,856 $ 547 $ 61,856 $ 154
- ---------------------------------------------------------------------------------------------------------------
11
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 8 - SUBORDINATED DEBENTURES - CAPITAL SECURITIES, CONTINUED
The Capital Securities are obligations of the Holding Company's wholly owned
statutory business trusts, Intervest Statutory Trust I, II, III and IV. Each
Trust was formed with a capital contribution of $464,000 from the Holding
Company and for the sole purpose of issuing and administering the Capital
Securities. The proceeds from the issuance of the Capital Securities together
with the capital contribution for each Trust were used to acquire the Holding
Company's Junior Subordinated Debentures that are due concurrently with the
Capital Securities. The Capital Securities, net of the Company's capital
contributions totaling $1.9 million, qualify as regulatory capital.
The sole assets of the Trusts, the obligors on the Capital Securities, are the
Junior Subordinated Debentures. In addition, for each Trust, the Holding Company
has guaranteed the payment of distributions on, payments on any redemptions of,
and any liquidation distribution with respect to the Capital Securities.
Issuance costs of $0.5 million, $0.4 million, $0.4 million and $0.2 million
associated with Capital Securities I, II, III and IV, respectively, have been
capitalized by the Holding Company and are being amortized over the life of the
securities using the straight-line method.
Interest payments on the Junior Subordinated Debentures (and the corresponding
distributions on the Capital Securities) are payable in arrears as follows:
Capital Securities I - semi-annually at the fixed rate of 9.875% per annum;
Capital Securities II - quarterly at the fixed rate of 6.75% per annum until
September 17, 2008 and thereafter at the rate of 2.95% over 3 month libor;
Capital Securities III - quarterly at the fixed rate of 5.88% per annum until
March 17, 2009 and thereafter at the rate of 2.79% over 3 month libor; and
Capital Securities IV - quarterly at the fixed rate of 6.20% per annum until
September 20, 2009 and thereafter at the rate of 2.40% over 3 month libor.
Interest payments may be deferred at any time and from time to time during the
term of the Junior Subordinated Debentures at the election of the Holding
Company for up to 20 consecutive quarterly periods, or 5 years. There is no
limitation on the number of extension periods the Holding Company may elect;
provided, however, no deferral period may extend beyond the maturity date of the
Junior Subordinated Debentures. During an interest deferral period, interest
will continue to accrue on the Junior Subordinated Debentures and interest on
such accrued interest will accrue at an annual rate equal to the interest rate
in effect for such deferral period, compounded quarterly from the date such
interest would have been payable were it not deferred. At the end of the
deferral period, the Holding Company will be obligated to pay all interest then
accrued and unpaid.
All of the Capital Securities are subject to mandatory redemption as follows:
(i) in whole, but not in part, upon repayment of the Junior Subordinated
Debentures at stated maturity or earlier, at the option of the Holding Company,
within 90 days following the occurrence and continuation of certain changes in
the tax or capital treatment of the Capital Securities, or a change in law such
that the Trust would be considered an investment company, contemporaneously with
the redemption by the Holding Company of the Junior Subordinated Debentures; and
(ii) in whole or in part at any time on or after December 18, 2006 for Capital
Securities I, September 17, 2008 for Capital Securities II, March 17, 2009 for
Capital Securities III, and September 20, 2009 for Capital Securities IV
contemporaneously with the optional redemption by the Holding Company of the
Junior Subordinated Debentures in whole or in part. Any redemption would be
subject to the receipt of regulatory approvals.
NOTE 9 - SHORT-TERM BORROWINGS AND LINES OF CREDIT
From time to time, the Bank may borrow funds on an overnight or short-term basis
to manage its liquidity needs. At March 31, 2006, the Bank had agreements with
correspondent banks whereby it could borrow up to $16 million on an unsecured
basis.
In addition, as a member of the Federal Home Loan Bank of New York (FHLB) and
the Federal Reserve Bank of New York (FRB), the Bank can also borrow from these
institutions on a secured basis. At March 31, 2006, the Bank had $23.5 million
of FHLB advances outstanding and had available collateral consisting of
investment securities to support total additional borrowings of $295 million
from the FHLB and FRB.
12
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 9 - SHORT-TERM BORROWINGS AND LINES OF CREDIT, CONTINUED
The following is a summary of certain information regarding short-term
borrowings in the aggregate:
Quarter Ended
March 31,
------------------
($in thousands) 2006 2005
- -----------------------------------------------------------------------
Balance at period end (1) $23,500 $15,000
Maximum amount outstanding at any month end $23,500 $17,000
Average outstanding balance for the period $ 1,522 $13,911
Weighted-average interest rate paid for the period 5.06% 2.62%
Weighted-average interest rate at period end 5.06% 2.96%
- -----------------------------------------------------------------------
<FN>
(1) The balance at March 31, 2006 represented FHLB advances that mature in April
2006.
NOTE 10 - COMMON STOCK WARRANTS
At March 31, 2006, there were 696,465 common stock warrants outstanding that
entitle its holder, the Chairman of the Board of the Company, to purchase one
share of the Holding Company's Class A or Class B common stock as the case may
be for each warrant. All warrants are vested and currently exercisable.
Data concerning common stock warrants is as follows:
Exercise Price Per Warrant
--------------------------- Wtd-Avg
Class A Common Stock Warrants: $6.67 Exercise Price
- ---------------------------------------------------------------------------------------------------
Outstanding at December 31, 2005 and March 31, 2006 501,465 $ 6.67
Remaining contractual life in years at March 31, 2006 0.8
- ---------------------------------------------------------------------------------------------------
Exercise Price Per Warrant
-------------------------- Total Wtd-Avg
Class B Common Stock Warrants: $6.67 $10.00 Warrants Exercise Price
- ------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2005 and March 31, 2006 145,000 50,000 195,000 $ 7.52
Remaining contractual life in years at March 31, 2006 1.8 1.8 1.8
- ------------------------------------------------------------------------------------------------------------
Effective January 1, 2006, the Company adopted SFAS No. 123-R, "Share-Based
Payment" which replaces SFAS 123 and supersedes APB No. 25. SFAS 123-R requires
companies to recognize in the income statement the grant-date fair value of
stock options and other equity-based compensation issued to employees and
directors, but expresses no preference for a type of valuation model. There were
no grants of warrants or options in the first quarter of 2006 and no
compensation expense recorded in any of the reporting periods in connection with
the Company's outstanding warrants.
NOTE 11 - EARNINGS PER SHARE (EPS)
Basic and diluted EPS are calculated in accordance with SFAS No. 128, "Earnings
per Share." Basic EPS is calculated by dividing net earnings by the
weighted-average number of shares of common stock outstanding. Diluted EPS is
calculated by dividing adjusted net earnings by the weighted-average number of
shares of common stock and dilutive potential common stock shares that may be
outstanding in the future.
Potential common stock shares consist of shares that may arise from outstanding
dilutive common stock warrants (the number of which is computed using the
"treasury stock method") and from outstanding convertible debentures (the number
of which is computed using the "if converted method"). Diluted EPS considers the
potential dilution that could occur if the Company's outstanding common stock
warrants and convertible debentures were converted into common stock that then
shared in the Company's earnings (as adjusted for interest expense, net of
taxes, that would no longer occur if the debentures were converted).
13
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED
- --------------------------------------------------------------------------------
NOTE 11 - EARNINGS PER SHARE (EPS), CONTINUED
Net earnings applicable to common stock and the weighted-average number of
shares used for basic and diluted earnings per share computations are summarized
in the table that follows:
Quarter Ended
March 31,
----------------------
($in thousands, except share and per share amounts) 2006 2005
- -----------------------------------------------------------------------------------------------
Basic Earnings Per Share:
Net earnings applicable to common stockholders $ 6,420 $ 3,248
Average number of common shares outstanding 7,825,746 6,273,843
- -----------------------------------------------------------------------------------------------
Basic Earnings Per Share $ 0.82 $ 0.52
- -----------------------------------------------------------------------------------------------
Diluted Earnings Per Share:
Net earnings applicable to common stockholders $ 6,420 $ 3,248
Adjustment to net earnings from assumed conversion of debentures (1) 40 55
----------------------
Adjusted net earnings for diluted earnings per share computation $ 6,460 $ 3,303
----------------------
Average number of common shares outstanding:
Common shares outstanding 7,825,746 6,273,843
Potential dilutive shares resulting from exercise of warrants (2) 308,888 255,207
Potential dilutive shares resulting from conversion of debentures (3) 212,149 342,719
----------------------
Total average number of common shares outstanding used for dilution 8,346,783 6,871,769
- -----------------------------------------------------------------------------------------------
Diluted Earnings Per Share $ 0.77 $ 0.48
- -----------------------------------------------------------------------------------------------
<FN>
(1) Represents interest expense on dilutive convertible debentures, net of
taxes, that would not occur if they were assumed converted.
(2) All outstanding warrants were considered for the EPS computations.
(3) Convertible debentures (principal and accrued interest) outstanding at
March 31, 2006 and 2005 totaling $3.3 million and $4.8 million,
respectively, were convertible into common stock at a price of $16.00 per
share in 2006 and $14.00 per share in 2005 and resulted in additional
common shares (based on average balances outstanding).
NOTE 12 - OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These instruments are in the form of commitments to extend credit, unused lines
of credit and standby letters of credit, and may involve, to varying degrees,
elements of credit and interest rate risk in excess of the amounts recognized in
the consolidated financial statements. The Company's maximum exposure to credit
risk is represented by the contractual amount of those instruments.
Commitments to extend credit are agreements to lend funds to a customer as long
as there is no violation of any condition established in the contract. Such
commitments generally have fixed expiration dates or other termination clauses
and normally require payment of fees. Since some of the commitments are expected
to expire without being drawn upon, the total commitment amount does not
necessarily represent future cash requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained upon extension of credit is based on management's credit evaluation of
the counterparty. Standby letters of credit are conditional commitments issued
by the Company to guarantee the performance of a customer to a third party. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loans to customers.
The contractual amounts of off-balance sheet financial instruments is summarized
as follows:
At March 31, At December 31,
------------- ----------------
($in thousands) 2006 2005
-----------------------------------------------------------
Unfunded loan commitments $ 153,101 $ 101,597
Available lines of credit 755 737
Standby letters of credit 100 100
-----------------------------------------------------------
$ 153,956 $ 102,434
-----------------------------------------------------------
14
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 13 - REGULATORY CAPITAL
The Holding Company is subject to regulation, examination and supervision by the
FRB. The Bank is also subject to regulation, examination and supervision by the
Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller
of the Currency of the United States of America (OCC). Intervest Securities
Corporation is subject to regulation, examination and supervision by the U.S.
Securities and Exchange Commission (SEC) and the National Association of
Securities Dealers (NASD).
The Company (on a consolidated basis) and the Bank are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet them can initiate certain mandatory and possibly discretionary
actions by the regulators that, if undertaken, could have a direct material
effect on the Company's and the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and the Bank must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities and certain off-balance sheet
items as calculated under regulatory accounting practices. These capital amounts
are also subject to qualitative judgment by the regulators about components,
risk weighting and other factors.
Quantitative measures established by the regulations to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of total
and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average
assets, as defined by the regulations.
The Federal Reserve on March 1, 2005 issued a final rule that retains trust
preferred securities in the Tier 1 capital of bank holding companies (BHC), but
with stricter quantitative limits and clearer qualitative standards. The new
rule provides a transition period for BHCs to meet the new, stricter limitations
within regulatory capital by allowing the limits on restricted core capital
elements to become fully effective as of March 31, 2009. Until March 31, 2009,
BHCs generally must comply with the current Tier 1 capital limits. As of March
31, 2006 and December 31, 2005, assuming the Company no longer included its
trust preferred securities in Tier 1 Capital, the Company would still exceed the
well capitalized threshold under the regulatory framework for prompt corrective
action.
Management believes, as of March 31, 2006 and December 31, 2005, that the
Company and the Bank met all capital adequacy requirements to which they are
subject. As of March 31, 2006, the most recent notification from the Bank's
regulators categorized the Bank as a well-capitalized institution under the
regulatory framework for prompt corrective action, which requires minimum Tier 1
leverage and Tier 1 and total risk-based capital ratios of 5%, 6% and 10%,
respectively. Management is not aware of any current conditions or events
outstanding that would change the designation from well capitalized.
At March 31, 2006, the actual capital of the Bank on a percentage basis was as
follows:
Actual Minimum To Be Considered
Ratios Requirement Well Capitalized
------- ------------ -----------------
Total capital to risk-weighted assets 12.67% 8.00% 10.00%
Tier 1 capital to risk-weighted assets 11.59% 4.00% 6.00%
Tier 1 capital to total average assets - leverage ratio 9.85% 4.00% 5.00%
At March 31, 2006, the actual capital of the Company (consolidated) on a
percentage basis was as follows:
Actual Minimum To Be Considered
Ratios Requirement Well Capitalized
------- ------------ ----------------
Total capital to risk-weighted assets 14.45% 8.00% NA
Tier 1 capital to risk-weighted assets 12.60% 4.00% NA
Tier 1 capital to total average assets - leverage ratio 10.89% 4.00% NA
Intervest Securities Corporation is subject to the SEC's Uniform Net Capital
Rule [15c3-1 (a) (2) (vi)], which requires the maintenance of minimum net
capital of $5,000. At March 31, 2006, Intervest Securities Corporation's net
capital was $505,000.
15
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 14 - RECENT ACCOUNTING PRONOUNCEMENTS
SHARE-BASED COMPENSATION. In December 2004, the FASB issued SFAS No. 123
(Revised 2004), "Share-Based Payment" (SFAS 123-R), which replaces the existing
SFAS 123 and supersedes APB No. 25. SFAS 123-R requires companies to recognize
in the income statement the grant-date fair value of stock options and other
equity-based compensation issued to employees and directors, but expresses no
preference for a type of valuation model. SFAS 123-R is effective for interim
and annual reporting periods beginning on January 1, 2006. SFAS 123-R does not
impact any of the Company's outstanding warrants at March 31, 2006, all of which
are vested and were issued prior to this new standard. The Company has not
issued any new stock warrants and/or options to employees or directors in the
first quarter of 2006. The Company will be required to recognize expense on new
stock warrants/options granted, or modified, which may have a material impact on
the Company's statement of earnings.
ACCOUNTING CHANGES AND ERROR CORRECTIONS. In May 2005, the FASB issued SFAS No.
154 "Accounting Changes and Error Corrections." This statement requires entities
that voluntarily make a change in accounting principle to apply that change
retrospectively to prior periods' financial statements, unless this would be
impracticable. SFAS No. 154 supersedes APB Opinion No. 20, Accounting Changes,
which previously required that most voluntary changes in accounting principle be
recognized by including in the current period's net income the cumulative effect
of changing to the new accounting principle. SFAS No. 154 also makes a
distinction between "retrospective application" of an accounting principle and
the "restatement" of financial statements to reflect the correction of an error.
Another significant change in practice under SFAS No. 154 will be that if an
entity changes its method of depreciation, amortization, or depletion for
long-lived, non-financial assets, the change must be accounted for as a change
in accounting estimate. Under APB Opinion No. 20, such a change would have been
reported as a change in accounting principle. SFAS No. 154 applies to accounting
changes and error corrections that are made in fiscal years beginning after
December 15, 2005. The Statement does not change the transition provisions of
any existing accounting pronouncements, including those that are in a transition
phase as of the effective date of this Statement. The adoption of this statement
on January 1, 2006 did not impact the Company's financial statements.
ACCOUNTING FOR LOAN COMMITMENTS. In March 2005, the SEC issued Staff Accounting
Bulletin No. 105, "Application of Accounting Principles to Loan Commitments"
(SAB 105). SAB 105 provides recognition guidance for entities that issue loan
commitments related to the origination of fixed- and variable-rate mortgage
loans that will be held for sale that are required to be accounted for as
derivative instruments. Currently, loan commitments that the Company enters into
would not be required to be accounted for as derivative instruments under SAB
105.
CONCENTRATION OF CREDIT RISKS. In December 2005, the FASB issued Statement of
Position ("SOP") 94-6-1, "Terms of Loan Products That May Give Rise to a
Concentration of Credit Risk." This statement addresses the circumstances under
which the terms of loan products give rise to a concentration of credit risk and
related disclosures and accounting considerations. It is intended to emphasize
the requirement to assess the adequacy of disclosures for all lending products
and the effect of changes in market or economic conditions on the adequacy of
those disclosures. SOP 94-6-1 is effective for all periods after December 19,
2005. The adoption of this SOP on January 1, 2006 did not impact the Company's
financial statements.
IMPAIRMENT. In November 2005, the FASB issued Staff Position ("FSP") 115-1, "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments," which superseded Emerging Issues Task Force Issue ("EITF") 03-1
and related amendments to EITF 03-1. The guidance in FSP 115-1 outlines a
three-step model for identifying investment impairments regarding impairment
measurement, other-than-temporary impairment evaluation and recognition of
other-than-temporary impairment losses and subsequent accounting. The FSP also
carries forward the disclosure requirements of EITF 03-1. FSP 115-1 is effective
for periods beginning after December 15, 2005. The adoption of this FSP on
January 1, 2006 did not impact the Company's financial statements.
16
INTERVEST BANCSHARES CORPORATION AND SUBSIDIARIES
REVIEW BY INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Hacker, Johnson & Smith, P.A., P.C., the Company's independent registered
public accounting firm, has made a limited review of the financial data as of
March 31, 2006 and for the three month periods ended March 31, 2006, and 2005
presented in this document, in accordance with the standards established by the
Public Company Accounting Oversight Board.
The report of Hacker, Johnson & Smith, P.A., P.C. furnished pursuant to
Article 10 of Regulation S-X is included herein.
17
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Intervest Bancshares Corporation
New York, New York:
We have reviewed the accompanying condensed consolidated balance sheet of
Intervest Bancshares Corporation and Subsidiaries (the "Company") as of March
31, 2006 and the related condensed consolidated statements of earnings, changes
in stockholders' equity and cash flows for three month periods ended March 31,
2006 and 2005. These interim financial statements are the responsibility of the
Company's management.
We conducted our reviews in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with the standards of the Public Company Accounting Oversight Board,
the objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public
Company Accounting Oversight Board, the consolidated balance sheet of the
Company as of December 31, 2005, and the related consolidated statements of
earnings, changes in stockholders' equity and cash flows for the year then ended
(not presented herein); and in our report dated February 3, 2006, we, based on
our audit expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 2005 is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
/s/ Hacker, Johnson & Smith, P.A., P.C.
- ---------------------------------------
HACKER, JOHNSON & SMITH, P.A.,P.C.
Tampa, Florida
April 27, 2006
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
--------
The following management's discussion of financial condition and results of
operations of Intervest Bancshares Corporation and subsidiaries should be read
in conjunction with the accompanying quarterly condensed consolidated financial
statements in this report on Form 10-Q as well as the entire Annual Report on
Form 10-K for the year ended December 31, 2005.
Intervest Bancshares Corporation has three wholly owned consolidated
subsidiaries - Intervest National Bank, Intervest Mortgage Corporation and
Intervest Securities Corporation (hereafter referred to collectively as the
"Company" on a consolidated basis). Intervest Bancshares Corporation and
Intervest National Bank may be referred to individually as the "Holding Company"
and the "Bank," respectively. Intervest Bancshares Corporation also has four
wholly owned unconsolidated subsidiaries, Intervest Statutory Trust I, II, III
and IV, which were formed in connection with the issuance of trust preferred
securities. For a discussion of the Company's business, see note 2 to the
condensed consolidated financial statements in this report.
The Company's principal revenues are derived from interest, dividends and fees
earned on its interest-earning assets, which are comprised of mortgage loans,
securities and other short-term investments. The Company's principal expenses
consist of interest paid on its interest-bearing liabilities, which are
comprised of deposits, debentures and other short-term borrowings, and its
operating and general expenses and income tax expense.
The Company's profitability depends primarily on its net interest income, which
is the difference between interest income generated from its interest-earning
assets and the interest expense incurred on its interest-bearing liabilities.
Net interest income is dependent upon the interest-rate spread, which is the
difference between the average yield earned on interest-earning assets and the
average rate paid on interest-bearing liabilities. When interest-earning assets
approximate or exceed interest-bearing liabilities, any positive interest-rate
spread will generate net interest income. The interest-rate spread is impacted
by interest rates, deposit flows and loan demand.
The Company's profitability is also affected by the level of its noninterest
income and expenses, provision for loan losses and income tax expense.
Noninterest income consists mostly of loan and other banking fees as well as
income from loan prepayments. When a mortgage loan is repaid prior to maturity,
the Company may recognize prepayment income, which consists of the recognition
of unearned fees associated with such loans at the time of payoff and the
receipt of additional prepayment fees and interest in certain cases. Many of the
Company's mortgage loans include provisions relating to prepayment and others
prohibit prepayment of indebtedness entirely. The Company's income from loan
prepayments fluctuates and cannot be predicted. Normally, loan prepayments tend
to increase during periods of declining interest rates and tend to decrease
during periods of increasing interest rates. However, given the nature and type
of the mortgage loans the Company originates, including their short average
life, the Company may still experience loan prepayments notwithstanding the
effects of movements in interest rates. Noninterest expenses consist of the
following: compensation and benefits, occupancy and equipment, data processing,
advertising, professional fees, FDIC and general insurance and other operating
and general expenses. The Company's profitability is also significantly affected
by general and local economic conditions, competition, changes in market
interest rates, government policies and actions of regulatory authorities.
Nearly all (99.9%) of the Company's loan portfolio is concentrated in mortgage
loans secured by commercial and multifamily real estate properties (including
rental and cooperative/condominium apartment buildings, office buildings,
mixed-use properties, shopping centers, hotels, restaurants, industrial
properties, parking lots/garages and vacant land). These loans have an average
life of approximately three years. The Company tends to lend in areas that are
in the process of being revitalized, with a concentration of loans on properties
located in New York State and the State of Florida. A significant portion of the
residential properties are located in New York City and are subject to rent
control and rent stabilization laws, which limit the ability of the property
owners to increase rents.
All loans are subject to the risk of default, otherwise known as credit risk,
which represents the possibility of the Company not recovering amounts due from
its borrowers. A borrower's ability to make payments due under a mortgage loan
is dependent upon the risks associated with real estate investments in general,
including the following: general or local economic conditions in the areas the
properties are located, neighborhood values, interest rates, real estate tax
rates, operating expenses of the mortgaged properties, supply of and demand for
rental
19
units, supply of and demand for properties, ability to obtain and maintain
adequate occupancy of the properties, zoning laws, governmental rules,
regulations and fiscal policies. Additionally, terrorist acts and armed
conflicts, such as the war on terrorism, and natural disasters, such as
hurricanes, may have an adverse impact on economic conditions. Economic
conditions affect the market value of the mortgaged properties underlying the
Company's loans as well as the levels of rent and occupancy of income-producing
properties.
CRITICAL ACCOUNTING POLICIES
----------------------------
The Company believes that currently its only accounting policy that is critical
to the presentation of its financial statements and requires estimates and
judgment on the part of management relates to the determination of the Company's
allowance for loan losses. The allowance for loan losses is a critical
accounting estimate because it is highly susceptible to change from period to
period requiring management to make assumptions about future loan chargeoffs.
The impact of a sudden large chargeoff could deplete the allowance and
potentially require increased provisions to replenish the allowance, which could
negatively affect the Company's earnings and financial position. A more detailed
discussion of the factors and estimates used in computing the allowance can be
found under the caption "Critical Accounting Policies" on pages 32 and 33 of the
Company's Annual Report on Form 10-K for the year ended December 31, 2005.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2006 AND DECEMBER 31, 2005
-------------------------------------------------------------------------
OVERVIEW
- --------
Total assets at March 31, 2006 increased to $1.79 billion, from $1.71 billon at
December 31, 2005. Total liabilities at March 31, 2006 increased to $1.65
billion, from $1.57 billion at December 31, 2005, and stockholders' equity
increased to $142.8 million at March 31, 2006, from $136.2 million at December
31, 2005. Book value per common share increased to $18.22 at March 31, 2006,
from $17.41 at December 31, 2005.
Selected balance sheet information as of March 31, 2006 follows:
Intervest Intervest Intervest Inter-
Holding National Mortgage Securities Company
($in thousands) Company Bank Corp. Corp. Amounts (1) Consolidated
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 3,696 $ 23,236 $ 19,122 $ 507 $ (18,730) $ 27,831
Security investments - 334,273 - - - 334,273
Loans receivable, net of deferred fees 11,401 1,297,634 92,973 - - 1,402,008
Allowance for loan losses (85) (15,175) (282) - - (15,542)
Investment in consolidated subsidiaries 189,859 - - - (189,859) -
All other assets 5,103 31,468 5,762 9 (388) 41,954
- ----------------------------------------------------------------------------------------------------------------------------
Total assets $209,974 $1,671,436 $ 117,575 $ 516 $ (208,977) $ 1,790,524
- ----------------------------------------------------------------------------------------------------------------------------
Deposits $ - $1,448,430 $ - $ - $ (18,749) 1,429,681
Borrowed funds and related interest payable 66,987 23,745 87,748 - - 178,480
All other liabilities 159 37,352 2,382 11 (369) 39,535
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities 67,146 1,509,527 90,130 11 (19,118) 1,647,696
- ----------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 142,828 161,909 27,445 505 (189,859) 142,828
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $209,974 $1,671,436 $ 117,575 $ 516 $ (208,977) $ 1,790,524
- ----------------------------------------------------------------------------------------------------------------------------
<FN>
(1) All significant intercompany balances and transactions are eliminated in consolidation. Such amounts arise largely from
intercompany deposit accounts and investments in subsidiaries.
A comparison of selected balance sheet information follows:
At March 31, 2006 At December 31, 2005
-------------------------- --------------------------
Carrying % of Carrying % of
($in thousands) Value Total Assets Value Total Assets
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 27,831 1.6% $ 56,716 3.3%
Security investments 334,273 18.7 256,749 15.0
Loans receivable, net of deferred fees and loan loss allowance 1,386,466 77.4 1,352,805 79.3
All other assets 41,954 2.3 40,153 2.4
- -----------------------------------------------------------------------------------------------------------------------
Total assets $ 1,790,524 100.0% $ 1,706,423 100.0%
- -----------------------------------------------------------------------------------------------------------------------
Deposits $ 1,429,681 79.8% $ 1,375,330 80.6%
Borrowed funds and related interest payable 178,480 10.0 155,725 9.1
All other liabilities 39,535 2.2 39,190 2.3
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities 1,647,696 92.0 1,570,245 92.0
- -----------------------------------------------------------------------------------------------------------------------
Stockholders' equity 142,828 8.0 136,178 8.0
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 1,790,524 100.0% $ 1,706,423 100.0%
- -----------------------------------------------------------------------------------------------------------------------
20
CASH AND CASH EQUIVALENTS
- ----------------------------
Cash and cash equivalents decreased to $27.8 million at March 31, 2006, from
$56.7 million at December 31, 2005. The decrease reflected the investment of
funds into loans and securities.
SECURITY INVESTMENTS
- ---------------------
Securities as to which the Company has the intent and ability to hold to
maturity are classified as held to maturity and carried at amortized cost.
Currently, only the Bank holds such security investments, which increased to
$328.0 million at March 31, 2006, from $251.5 million at December 31, 2005. The
increase reflected new purchases exceeding maturities and calls during the
period. The Bank continues to invest in short-term (up to 5 year maturities)
U.S. government agency debt obligations to emphasize liquidity and to currently
target its loan-to-deposit ratio at approximately 85%. This ratio stood at 87%
at March 31, 2006.
At March 31, 2006, the held-to-maturity portfolio consisted of short-term debt
obligations of the Federal Home Loan Bank, Federal Farm Credit Bank, Federal
National Mortgage Association and Federal Home Loan Mortgage Corporation with a
weighted-average yield of 3.88% and a weighted-average remaining maturity of 1.4
years, compared to 3.26% and 1.1 years, respectively, at December 31, 2005. The
securities are fixed rate or have predetermined scheduled rate increases, and
some have call features that allow the issuer to call the security before its
stated maturity without penalty.
At March 31, 2006 and December 31, 2005, the held-to-maturity portfolio's
estimated fair value was $325.3 million and $249.1 million, respectively. At
March 31, 2006, the held-to-maturity portfolio had unrealized losses totaling
$2.7 million. The Bank has the ability and intent to hold the securities in the
portfolio for a period of time sufficient for the fair value of the securities
to recover. To date, the Bank has always recovered the cost of its investment
securities upon maturity.
In order for the Bank to be a member of the Federal Reserve Bank (FRB) and the
Federal Home Loan Bank of New York (FHLB), the Bank maintains an investment in
their capital stock, which amounted to $3.4 million and $2.9 million,
respectively, at March 31, 2006. The FRB stock currently pays a dividend of 6%,
while the FHLB stock dividend fluctuates and most recently was 5.11%. The total
investment, which amounted to $6.3 million at March 31, 2006, compared to $5.2
million at December 31, 2005, fluctuates based on the Bank's capital level for
the FRB stock and the Bank's loans and borrowings for the FHLB stock.
LOANS RECEIVABLE, NET OF DEFERRED FEES AND ALLOWANCE FOR LOAN LOSSES
- --------------------------------------------------------------------
Loans receivable, net of deferred fees and the allowance for loan losses,
increased to $1.39 billion at March 31, 2006 from $1.35 billion at December 31,
2005. The growth reflected new mortgage loan originations secured by commercial
and multifamily real estate exceeding principal repayments. New loan
originations totaled $144 million in the first quarter of 2006, compared to $151
million in the first quarter of 2005.
Nearly all (99.9%) of the Company's loan portfolio is concentrated in mortgage
loans secured by commercial and multifamily real estate properties (including
rental and cooperative/condominium apartment buildings, office buildings,
mixed-use properties, shopping centers, hotels, restaurants, industrial
properties, parking lots/garages and vacant land). At March 31, 2006, such loans
consisted of 540 loans with an aggregate principal balance of $1.41 billion and
an average principal size of $2.6 million. Loans with principal balances of $5.0
million or more aggregated to 70 loans or $658.2 million, with the largest loan
amounting to $20.5 million.
At March 31, 2006, there were three multifamily real estate loans totaling $1.7
million on nonaccrual status, compared to two loans totaling $0.7 million at
December 31, 2005. With respect to two of these loans totaling $0.7 million, the
borrower declared bankruptcy and the Bankruptcy Trustee has sold the properties
collateralizing the loans. The proceeds of the sale are sufficient to provide
for repayment of the Company's recorded investment and the Company is taking
appropriate action to obtain the proceeds from the Bankruptcy Trustee. With
respect to the remaining loan amounting to $1.0 million, a foreclosure action
has been commenced for non-payment. Nonaccrual loans are considered impaired
under the criteria of SFAS No. 114, but no valuation allowance was maintained at
any time since the Company believes that the estimated fair value of the
underlying properties exceeded its recorded investment. At March 31, 2006 and
December 31, 2005, there were no other impaired loans.
At March 31, 2006 and December 31, 2005, there were $1.5 million and $2.6
million, respectively, of loans ninety days past due and still accruing
interest. These loans were deemed by management to be well secured and in the
21
process of collection. The amount at March 31, 2006 represented two loans that
are past their maturity date, but in each case the borrower continues to make
monthly payments of interest and principal. Based upon discussions with the
borrowers, it is anticipated that these loans will be repaid in full or
refinanced in the near term.
At March 31, 2006, the allowance for loan losses amounted to $15.5 million,
compared to $15.2 million at December 31, 2005. The allowance represented 1.11%
of total loans (net of deferred fees) outstanding at March 31, 2006 and December
31, 2005. The increase in the allowance was due to provisions aggregating $0.3
million during the period resulting largely from net loan growth (which amounted
to $33.2 million from December 31, 2005). For a further discussion of the
criteria the Company uses to determine the adequacy of the allowance, see the
section entitled "Critical Accounting Policies" included in this report.
ALL OTHER ASSETS
- ----------------
All other assets increased to $42.0 million at March 31, 2006, from $40.2
million at December 31, 2005, primarily due to an increase in accrued interest
receivable, which fluctuates based on the amount of loans, investments and other
interest-earning assets outstanding and the timing of interest payments
received. The increase was due to the growth in these assets.
DEPOSITS
- --------
Deposits increased to $1.43 billion at March 31, 2006, from $1.38 billion at
December 31, 2005, reflecting increases in certificate of deposit accounts of
$33.4 million and an increase in checking, savings and money market accounts
totaling $21.0 million.
At March 31, 2006, certificate of deposit accounts totaled $1.15 billion, and
checking, savings and money market accounts aggregated $277.7 million. The same
categories of deposit accounts totaled $1.12 billion and $256.8 million,
respectively, at December 31, 2005. Certificate of deposit accounts represented
81% of total deposits at March 31, 2006 and December 31, 2005. At March 31, 2006
and December 31, 2005, certificate of deposit accounts included $40.5 million of
brokered deposits.
BORROWED FUNDS AND RELATED INTEREST PAYABLE
- ------------------------------------------------
At March 31, 2006, borrowed funds and related interest payable increased to
$178.5 million from $155.7 million at December 31, 2005. The increase was due to
$23.5 million of short-term borrowings in March 2006 from the Federal Home Loan
Bank of New York by the Bank.
ALL OTHER LIABILITIES
- -----------------------
All other Liabilities remained relatively unchanged at $39.5 million at March
31, 2006, compared to $39.2 million at December 31, 2005.
STOCKHOLDERS' EQUITY
- ---------------------
Stockholders' equity increased to $142.8 million at March 31, 2006, from $136.2
million at December 31, 2005 as follows:
Per
($in thousands) Amount Shares Share
-----------------------------------------------------------------------------------------------
Stockholders' equity at December 31, 2005 $136,178 7,823,058 $17.41
Net earnings for the period 6,420 - -
Convertible debentures converted at election of debenture holders 230 14,584 15.75
-----------------------------------------------------------------------------------------------
Stockholders' equity at March 31, 2006 $142,828 7,837,642 $18.22
-----------------------------------------------------------------------------------------------
22
COMPARISON OF RESULTS OF OPERATIONS FOR THE QUARTERS ENDED
---------------------------------------------------------
MARCH 31, 2006 AND 2005
-----------------------
OVERVIEW
- --------
Consolidated net earnings for the first quarter of 2006 increased by $3.2
million, or 100%, to $6.4 million, or $0.77 per diluted share, from $3.2
million, or $0.48 per diluted share, in the first quarter of 2005. The earnings
per share calculation for the 2006 period included a greater number of
outstanding shares resulting primarily from a public offering of 1.4 million
shares of Class A common stock completed in the third quarter of 2005.
The $3.2 million increase in consolidated earnings reflected a $4.2 million
increase in net interest and dividend income, a $1.2 million increase in
noninterest income and a $0.7 million decrease in the provision for loan losses,
partially offset by a $2.5 million increase in income tax expense and a $0.4
million increase in noninterest expenses.
The Company's efficiency ratio, which is a measure of its ability to control
expenses as a percentage of its revenues, continues to be favorable and improved
to 19% in the first quarter of 2006, from 26% in the first quarter of 2005. The
Company's return on average assets and equity also increased to 1.47% and
18.55%, respectively, in the 2006 first quarter, from 0.94% and 14.25% in the
2005 first quarter.
Selected information regarding results of operations for the first quarter of
2006 follows:
Intervest Intervest Intervest Inter-
National Mortgage Securities Holding Company
($in thousands) Bank Corp. Corp. Company Amounts(2) Consolidated
- ------------------------------------------------------------------------------------------------------------------------
Interest and dividend income $ 27,456 $ 2,685 $ 5 $ 198 $ (278) $ 30,066
Interest expense 14,860 1,782 - 1,216 (278) 17,580
----------------------------------------------------------------------------
Net interest and dividend income 12,596 903 5 (1,018) - 12,486
Provision for loan losses 329 32 - - - 361
Noninterest income 1,933 1,439 - 119 (1,409) 2,082
Noninterest expenses 3,281 769 5 150 (1,409) 2,796
----------------------------------------------------------------------------
Earnings before taxes 10,919 1,541 - (1,049) - 11,411
Provision for income taxes 4,763 712 - (484) - 4,991
- ------------------------------------------------------------------------------------------------------------------------
Net earnings $ 6,156 $ 829 $ - $ (565) $ - $ 6,420
- ------------------------------------------------------------------------------------------------------------------------
Intercompany dividends(1) (1,089) - - 1,089 - -
- ------------------------------------------------------------------------------------------------------------------------
Net earnings after intercompany dividends $ 5,067 $ 829 $ - $ 524 $ - $ 6,420
- ------------------------------------------------------------------------------------------------------------------------
Net earnings after intercompany dividends
for the same period of 2005 $ 2,092 $ 625 $ (2) $ 533 $ - $ 3,248
- ------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Dividends to the Holding Company from the Bank provide funds for the debt service on the subordinated
debentures-capital securities, which is included in the Holding Company's interest expense.
(2) All significant intercompany balances and transactions are eliminated in consolidation. Such amounts arise from
intercompany deposit accounts and management and service agreements.
NET INTEREST AND DIVIDEND INCOME
- ------------------------------------
Net interest and dividend income is the Company's primary source of earnings and
is influenced primarily by the amount, distribution and repricing
characteristics of its interest-earning assets and interest-bearing liabilities
as well as by the relative levels and movements of interest rates.
Net interest and dividend income increased to $12.5 million in the first quarter
of 2006, from $8.3 million in the first quarter of 2005. The improvement was
attributable to a $371 million increase in average interest-earning assets
resulting from continued growth in loans of $321 million and a higher level of
security and short-term investments aggregating $50 million. The growth in
average assets was funded by $333 million of additional interest-bearing
deposits and a $47 million increase in stockholders' equity, partially offset by
a $19 million decrease in borrowed funds.
The Company's net interest margin increased to 2.92% in the first quarter of
2006, from 2.47% in the first quarter of 2005. The higher margin was due to the
Company's yield on interest-earning assets increasing at a faster pace than its
cost of funds. In a rising rate environment, the yield on interest-earning
assets increased 92 basis points to 7.04% in the 2006 quarter due to higher
yields on new mortgage loans originated, rate increases on existing
variable-rate loans indexed to the prime rate, and higher yields earned on
security and other short-term investments. The cost of funds also increased by
57 basis points to 4.55% in the 2006 quarter primarily due to higher rates paid
on deposit accounts.
23
The following table provides information on: average assets, liabilities and
stockholders' equity; yields earned on interest-earning assets; and rates paid
on interest-bearing liabilities for the periods indicated. The yields and rates
shown are based on a computation of income/expense (including any related fee
income or expense) for each period divided by average interest-earning
assets/interest-bearing liabilities during each period. Average balances are
derived from daily balances. Net interest margin is computed by dividing net
interest and dividend income by the average of total interest-earning assets
during each period.
--------------------------------------------------------------------
Quarter Ended
--------------------------------------------------------------------
March 31, 2006 March 31, 2005
--------------------------------- ---------------------------------
Average Interest Yield/ Average Interest Yield/
($in thousands) Balance Inc./Exp. Rate(2) Balance Inc./Exp. Rate(2)
- -----------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets:
Loans (1) $1,392,837 $ 26,931 7.84% $1,071,862 $ 18,811 7.12%
Securities 304,061 2,747 3.66 258,037 1,563 2.46
Other interest-earning assets 36,175 388 4.35 32,433 194 2.43
- -----------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,733,073 $ 30,066 7.04% 1,362,332 $ 20,568 6.12%
- -----------------------------------------------------------------------------------------------------------------------
Noninterest-earning assets 15,656 15,153
- -----------------------------------------------------------------------------------------------------------------------
Total assets $1,748,729 $1,377,485
- -----------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest checking deposits $ 8,533 $ 40 1.90% $ 13,441 $ 52 1.57%
Savings deposits 16,591 121 2.96 25,268 113 1.81
Money market deposits 237,374 2,293 3.92 194,375 1,059 2.21
Certificates of deposit 1,147,864 12,105 4.28 844,031 7,815 3.76
- -----------------------------------------------------------------------------------------------------------------------
Total deposit accounts 1,410,362 14,559 4.19 1,077,115 9,039 3.40
- -----------------------------------------------------------------------------------------------------------------------
FHLB Advances 1,522 19 5.06 13,911 90 2.62
Debentures and related interest payable 92,284 1,908 8.38 99,197 2,060 8.42
Debentures - capital securities 61,856 1,090 7.15 61,856 1,090 7.15
Mortgage note payable 228 4 7.12 241 4 7.00
- -----------------------------------------------------------------------------------------------------------------------
Total borrowed funds 155,890 3,021 7.86 175,205 3,244 7.51
- -----------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,566,252 $ 17,580 4.55% 1,252,320 $ 12,283 3.98%
- -----------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 6,504 6,186
Noninterest-bearing liabilities 37,543 27,820
Stockholders' equity 138,430 91,159
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,748,729 $1,377,485
- -----------------------------------------------------------------------------------------------------------------------
Net interest and dividend income/spread $ 12,486 2.49% $ 8,285 2.14%
- -----------------------------------------------------------------------------------------------------------------------
Net interest-earning assets/margin $ 166,821 2.92% $ 110,012 2.47%
- -----------------------------------------------------------------------------------------------------------------------
Ratio of total interest-earning assets
to total interest-bearing liabilities 1.11 1.09
- -----------------------------------------------------------------------------------------------------------------------
OTHER RATIOS:
Return on average assets (2) 1.47% 0.94%
Return on average equity (2) 18.55% 14.25%
Noninterest expense to average assets (2) 0.64% 0.69%
Efficiency ratio (3) 19% 26%
Average stockholders' equity to average assets 7.92% 6.62%
- -----------------------------------------------------------------------------------------------------------------------
<FN>
(1) Includes nonaccrual loans.
(2) Annualized.
(3) Defined as noninterest expenses (excluding the provision for loan losses) as a percentage of net interest and
dividend income plus noninterest income.
The following table provides information regarding changes in interest and
dividend income and interest expense. For each category of interest-earning
assets and interest-bearing liabilities, information is provided on changes
attributable to (1) changes in rate (change in rate multiplied by prior volume),
(2) changes in volume (change in volume multiplied by prior rate) and (3)
changes in rate-volume (change in rate multiplied by change in volume).
24
For the Quarter Ended March 31, 2006 vs 2005
----------------------------------------------------------------------
Increase (Decrease) Due To Change In:
----------------------------------------------------------------------
($in thousands) Rate Volume Rate/Volume Total
- -------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Loans $ 1,929 $ 5,713 $ 478 $ 8,120
Securities 774 283 127 1,184
Other interest-earning assets 156 23 15 194
- -------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 2,859 6,019 620 9,498
- -------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Interest checking deposits 11 (19) (4) (12)
Savings deposits 73 (39) (26) 8
Money market deposits 831 238 165 1,234
Certificates of deposit 1,097 2,856 337 4,290
- -------------------------------------------------------------------------------------------------------------------
Total deposit accounts 2,012 3,036 472 5,520
- -------------------------------------------------------------------------------------------------------------------
FHLB advances 85 (81) (75) (71)
Debentures and accrued interest payable (10) (146) 4 (152)
Debentures - capital securities - - - -
Mortgage note payable - - - -
- -------------------------------------------------------------------------------------------------------------------
Total borrowed funds 75 (227) (71) (223)
- -------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 2,087 2,809 401 5,297
- -------------------------------------------------------------------------------------------------------------------
Net change in interest and dividend income $ 772 $ 3,210 $ 219 $ 4,201
- -------------------------------------------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES
- -------------------------
The provision for loan losses decreased by $0.7 million to $0.3 million in the
first quarter of 2006, from $1.0 million in the first quarter of 2005. The lower
provision was primarily due to a decrease in the rate of net loan growth over
the prior year period. Total loans outstanding grew by $33.2 million in the 2006
period, compared to $79.9 million in the 2005 period.
NONINTEREST INCOME
- ------------------
Noninterest income increased by $1.2 million to $2.1 million in the first
quarter of 2006, from $0.9 million in the first quarter of 2005. The higher
income was primarily due to a $1.0 million increase in income from the
prepayment of mortgage loans. Income from the prepayment of mortgage loans
consists of the recognition of unearned fees associated with such loans at the
time of payoff and the receipt of prepayment penalties and interest in certain
cases. The Company's income from loan prepayments fluctuates and cannot be
predicted. Normally, loan prepayments tend to increase during periods of
declining interest rates and tend to decrease during periods of increasing
interest rates. However, given the nature and type of the mortgage loans the
Company originates, including their short average life, the Company may still
experience loan prepayments notwithstanding the effects of movements in interest
rates.
NONINTEREST EXPENSES
- --------------------
Noninterest expenses increased by $0.4 million to $2.8 million in the first
quarter of 2006, from $2.4 million in the first quarter of 2005. The increase
was primarily to higher salaries and employee benefits expenses of $0.2 million
and $0.2 million aggregate increase in all other operating expenses associated
with the Company's growth. The Company had 76 employees at March 31, 2006,
compared to 67 at March 31, 2005.
PROVISION FOR INCOME TAXES
- --------------------------
The provision for income taxes increased by $2.5 million to $5.0 million in the
first quarter of 2006, from $2.5 million in the first quarter of 2005 due to an
increase in pre-tax income. The Company's effective tax rate (inclusive of
state and local taxes) amounted to 43.7% in the 2006 period, compared to 43.6%
in the 2005 period.
OFF-BALANCE SHEET AND OTHER FINANCING ARRANGEMENTS
--------------------------------------------------
The Company is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. For a
further discussion of these financial instruments, see note 12 to the condensed
consolidated financial statements included in this report.
25
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company manages its liquidity position on a daily basis to assure that funds
are available to meet operations, loan and investment commitments, deposit
withdrawals and the repayment of borrowed funds. The Company's primary sources
of funds consist of the following: retail deposits obtained through the Bank's
branch offices and through the mail; principal repayments of loans; maturities
and calls of securities; issuance of debentures; borrowings from the federal
funds market and through FHLB advances; and cash flow provided by operating
activities. For additional detail concerning the Company's cash flows, see the
condensed consolidated statements of cash flows included in this report.
The Bank's lending business is dependent on its continuing ability to generate a
positive interest rate spread between the rates offered on its deposits and the
yields earned on its loans. The Bank needs to pay competitive interest rates to
attract and retain time deposits to fund its loan originations. The Bank has and
expects to continue to rely heavily on certificates of deposit (time deposits)
as its main source of funds. Total consolidated deposits amounted to $1.43
billion at March 31, 2006 and time deposits represented 81%, or $1.15 billion,
of those deposits. Additionally, time deposits of $100,000 or more at March 31,
2006 totaled $388.1 million and included $40.5 million of brokered deposits. The
Bank must maintain its status as a well-capitalized insured depository
institution in order to solicit and accept, renew or roll over any brokered
deposit without restriction. Time deposits are the only deposit accounts offered
by the Bank that have stated maturity dates. These deposits are generally
considered to be rate sensitive and have a higher cost than deposits with no
stated maturities, such as checking, savings and money market accounts. At March
31, 2006, the Bank had $417.7 million of time deposits maturing by March 31,
2007. The Bank expects that a substantial portion of these deposits will be
renewed and stay with the Bank. The Bank has and expects to continue to rely on
capital contributions from the Holding Company to increase its capital to
support its rapid asset growth. The Holding Company made a total of $32.5
million of capital contributions to the Bank during 2005. No contributions of
capital were made in the first quarter of 2006.
The Bank, from time to time, may borrow funds on an overnight or short-term
basis to manage its liquidity needs. At March 31, 2006, the Bank had agreements
with correspondent banks whereby it could borrow up to $16 million on an
unsecured basis. In addition, as a member of the FHLB and FRB, the Bank can also
borrow from these institutions on a secured basis. In the first quarter of 2006,
the Bank borrowed a total of $23.5 million of short-term FHLB advances, all of
which were outstanding at March 31, 2006. At December 31, 2005, there were no
outstanding borrowings from any of the aforementioned sources. At March 31,
2006, the Bank had available collateral consisting of investment securities to
support additional total borrowings of $295 million from the FHLB and FRB.
Intervest Mortgage Corporation has and expects to continue to rely on the
issuance of its subordinated debentures in registered, best efforts offerings to
the public as a source of funds to support its loan originations. In addition,
as the Bank's mortgage loan portfolio has grown, service fee income received by
Intervest Mortgage Corporation from the Bank has comprised an increasing
percentage of Intervest Mortgage Corporation's cash flow. The Bank has a
servicing agreement with Intervest Mortgage Corporation, which is described
under the caption "Liquidity and Capital Resources" on page 46 of the Company's
Annual Report of Form 10-K. In addition, from time to time, Intervest Mortgage
Corporation has also received capital contributions from the Holding Company.
There have been no capital contributions since August 2004.
Intervest Mortgage Corporation's lending business is dependent on its continuing
ability to sell its debentures with interest rates that would result in a
positive interest rate spread, which is the difference between yields earned on
its loans and the rates paid on its debentures. As detailed in note 7 to the
condensed consolidated financial statements included in this report, at March
31, 2006, $82.8 million in aggregate principal amount of Intervest Mortgage
Corporation's subordinated debentures were outstanding with fixed interest rates
that range from 6.25% to 9.00% per annum and maturities that range from July 1,
2006 to October 1, 2013. In the first quarter of 2006, Intervest Mortgage
Corporation did not repay or issue new debentures. At March 31, 2006, Intervest
Mortgage Corporation had $16.0 million of debentures and related accrued
interest payable maturing by December 31, 2007 (of which $5.2 million were
repaid early on May 1, 2006), which are expected to be repaid from cash flow
generated from maturities of existing mortgage loans, ongoing operations and
cash on hand. Intervest Mortgage Corporation anticipates completing a public
offering of up to $16.0 million in aggregate principal amount of additional
debentures in the second quarter of 2006.
26
The Holding Company's sources of funds and capital to date have been derived
from the following: interest income from a limited portfolio of mortgage loans
and short-term investments; monthly dividends from the Bank to service interest
expense on trust preferred securities; monthly management fees from Intervest
Mortgage Corporation and the Bank for providing these subsidiaries with certain
administrative services; the issuance of its common stock through public
offerings, exercise of outstanding common stock warrants and conversion of
outstanding convertible debentures; the issuance of trust preferred securities
through its wholly owned business trusts; and the direct issuance of other
subordinated debentures to the public. At March 31, 2006, the Holding Company
did not have any debentures maturing by December 31, 2007.
The Holding Company, through its wholly owned business trusts Intervest
Statutory Trust I, II, III and IV, issued in December 2001, September 2003,
March 2004 and September 2004, $15.0 million, respectively, of trust preferred
securities for a total of $60 million at both fixed and variable rates of
interest that mature in 2031 or later. The total proceeds from these securities
have been invested in the Bank at various times through capital contributions.
The Holding Company is required to make interest payments on the principal of
those securities, which currently amount to $4.4 million annually. The Bank
provides funds to Holding Company in the form of dividends for this purpose. At
March 31, 2006, approximately $47.6 million of the trust preferred securities
qualified as regulatory Tier 1 capital and the remainder qualified as Tier 2
capital in the Holding Company's computation of regulatory capital.
Additional information concerning outstanding time deposits, debentures and
trust preferred securities, including interest rates and maturity dates can be
found in notes 6, 7 and 8 of the notes to the condensed consolidated financial
statements included in this report.
At March 31, 2006, the Company's total commitments to lend aggregated to $154
million. Although there is no certainty, management anticipates that the
majority of these loan commitments will be funded over the next 12 months. If
all these commitments were to close, they would be funded by the sources of
funds described above. The Company considers its current liquidity and sources
of funds sufficient to satisfy its outstanding lending commitments and its
maturing liabilities. Management is not aware of any trends, known demand,
commitments or uncertainties which are expected to have a material impact on
future operating results, liquidity or capital resources.
REGULATORY CAPITAL
------------------
The Bank is subject to various regulatory capital requirements. The Federal
Deposit Insurance Corporation (FDIC) and other bank regulatory agencies use five
capital categories ranging from well capitalized to critically undercapitalized
to determine various matters, including prompt corrective action and each
institution's FDIC deposit insurance premiums. These categories involve
quantitative measures of a bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
capital amounts and classifications are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors. Failure to
meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by the regulators that, if undertaken, could
have a direct material effect on the Company's consolidated financial
statements.
The Bank is required to maintain regulatory defined minimum Tier 1 leverage and
Tier 1and total risk-based capital ratio levels of at least 4%, 4% and 8%,
respectively. At March 31, 2006 and December 31, 2005, management believes the
Bank met its capital adequacy requirements and is a well-capitalized institution
as defined in the regulations, which require minimum Tier 1 leverage and Tier 1
and total risk-based ratios of 5%, 6% and 10%, respectively. Management is not
aware of any conditions or events that would change the Bank's designation as a
well-capitalized institution.
Information regarding the Bank's regulatory capital and related ratios is
summarized as follows:
At March 31, At December 31,
-------------- -----------------
($in thousands) 2006 2005
--------------------------------------------------------------------------
Tier 1 Capital $ 161,909 $ 156,842
Tier 2 Capital 15,175 14,846
--------------------------------------------------------------------------
Total risk-based capital $ 177,084 $ 171,688
--------------------------------------------------------------------------
Net risk-weighted assets $ 1,397,124 $ 1,362,728
Average assets for regulatory purposes $ 1,643,444 $ 1,562,779
--------------------------------------------------------------------------
Tier 1 capital to average assets 9.85% 10.04%
Tier 1 capital to risk-weighted assets 11.59% 11.51%
Total capital to risk-weighted assets 12.67% 12.60%
--------------------------------------------------------------------------
27
The Holding Company on a consolidated basis is subject to minimum regulatory
capital requirements administered by the FRB. These guidelines require a ratio
of Tier 1 or Core Capital, as defined in the guidelines, to total risk-weighted
assets of at least 4% and a ratio of total capital to risk-weighted assets of at
least 8%. The guidelines also require a ratio of Tier 1 capital to adjusted
total average assets of not less than 3%. At March 31, 2006 and December 31,
2005, management believes that the Holding Company met its capital adequacy
requirements.
Information regarding the Company's (consolidated) regulatory capital and
related ratios is summarized below:
At March 31, At December 31,
-------------- -----------------
($in thousands) 2006 2005
--------------------------------------------------------------------------
Tier 1 Capital (1) $ 190,437 $ 181,571
Tier 2 Capital (1) 27,933 29,788
--------------------------------------------------------------------------
Total risk-based capital $ 218,370 $ 211,359
--------------------------------------------------------------------------
Net risk-weighted assets $ 1,511,064 $ 1,466,027
Average assets for regulatory purposes $ 1,748,729 $ 1,673,832
--------------------------------------------------------------------------
Tier 1 capital to average assets 10.89% 10.85%
Tier 1 capital to risk-weighted assets 12.60% 12.39%
Total capital to risk-weighted assets 14.45% 14.42%
--------------------------------------------------------------------------
<FN>
(1) There are $60 million of qualifying capital securities outstanding (total
debentures of $61.9 million issued to Statutory Trust I, II, III and IV by
the Holding Company less the Holding Company's investments in those trusts
aggregating $1.9 million). At March 31, 2006 and December 31, 2005, $47.6
million and $45.4 million of those securities, respectively, was included
in Tier 1 Capital, and the remaining portion was included in Tier 2
Capital.
The Federal Reserve on March 1, 2005 issued a final rule that retains trust
preferred securities in the Tier 1 capital of bank holding companies (BHC), but
with stricter quantitative limits and clearer qualitative standards. The new
rule provides a transition period for BHCs to meet the new, stricter limitations
within regulatory capital by allowing the limits on restricted core capital
elements to become fully effective as of March 31, 2009. For a further
discussion of these changes, see page 49 of the Company's Annual Report on Form
10-K for the year ended December 31, 2005. As of March 31, 2006 and December 31,
2005, assuming the Company no longer included its trust preferred securities in
Tier 1 Capital, the Company would still exceed the well capitalized threshold
under the regulatory framework for prompt corrective action.
Intervest Securities Corporation is subject to the Securities and Exchange
Commission's (SEC) Uniform Net Capital Rule [15c3-1 (a) (2) (vi)], which
requires the maintenance of minimum net capital of $5,000. At March 31, 2006 and
December 31, 2005, Intervest Securities Corporation's net capital was $0.5
million.
SARBANES OXLEY ACT OF 2002
--------------------------
The requirements of Section 404 of the Sarbanes Oxley Act and SEC rules and
regulations require an annual management report on the Company's internal
controls over financial reporting, including, among other matters, management's
assessment of the effectiveness of the Company's internal controls over
financial reporting, and an attestation report by the Company's independent
registered public accounting firm addressing these assessments.
Beginning with the Company's annual report for the year ending December 31,
2006, the Company will have to include in its annual report on Form 10-K filed
with the SEC a report of management regarding the Company's internal controls
over financial reporting in accordance with the above requirements.
In this regard, the Company is in the process of documenting and evaluating its
internal controls over financial reporting in order to satisfy these
requirements. The process includes the involvement of internal resources and the
retention of outside consultants. This process is designed to (i) assess and
document the adequacy of internal controls over financial reporting, (ii) take
steps to improve control processes, where appropriate, and (iii) verify through
testing that controls are functioning as documented. To date, the Company has
identified certain deficiencies in the design and operating effectiveness of its
internal controls over financial reporting, and it believes that they have been
corrected or are in the process of being corrected. Although this process is not
completed, management is not aware of any "significant deficiencies" or
"material weaknesses" in the Company's internal controls over financial
reporting, as defined in applicable SEC rules and regulations.
28
ASSET AND LIABILITY MANAGEMENT
------------------------------
Interest rate risk arises from differences in the repricing of assets and
liabilities within a given time period. The Company does not engage in trading
or hedging activities, nor does it invest in interest rate derivatives or enter
into interest rate swaps. The primary objective of the Company's
asset/liability management strategy is to limit, within established guidelines,
the adverse impact of changes in interest rates on its net interest income and
capital.
The Company uses "gap analysis," which measures the difference between
interest-earning assets and interest-bearing liabilities that mature or reprice
within a given time period, to monitor its interest rate sensitivity. For a
further discussion of gap analysis, including the factors that effect its
computation and results, see page 50 of the Company's Annual Report on Form 10-K
for the year ended December 31, 2005.
The Company's one-year positive interest rate sensitivity gap decreased to
$451.5 million, or 25.2% of total assets, at March 31, 2006, from $498.7
million, or 29.2% at December 31, 2005. The decrease in the positive gap
primarily reflects an increase in security investments with over one-year
maturities, funded by increases in money-market deposit accounts, short-term
borrowings and time deposits with terms of less than one year.
For purposes of computing the gap, all deposits with no stated maturities are
treated as readily accessible accounts. However, if such deposits were treated
differently, the one-year gap would then change. The behavior of core depositors
may not necessarily result in the immediate withdrawal of funds in the event
deposit rates offered by the Bank did not change as quickly and uniformly as
changes in general market rates. For example, if only 25% of deposits with no
stated maturity were assumed to be readily accessible, the one-year gap would
have been a positive 36.6% at March 31, 2006, compared to a positive 40.1% at
December 31, 2005.
The table that follows summarizes interest-earning assets and interest-bearing
liabilities as of March 31, 2006, that are scheduled to mature or reprice within
the periods shown.
0-3 4-12 Over 1-4 Over 4
--- ---- -------- ------
($in thousands) Months Months Years Years Total
- -----------------------------------------------------------------------------------------------------
Loans (1) $555,764 $410,826 $ 362,117 $ 85,556 $1,414,263
Securities held to maturity (2) 69,872 114,892 143,210 - 327,974
Short-term investments 19,133 - - - 19,133
FRB and FHLB stock 2,860 - - 3,439 6,299
- -----------------------------------------------------------------------------------------------------
Total rate-sensitive assets $647,629 $525,718 $ 505,327 $ 88,995 $1,767,669
- -----------------------------------------------------------------------------------------------------
Deposit accounts (3):
Interest checking deposits $ 8,903 $ - $ - $ - $ 8,903
Savings deposits 15,913 - - - 15,913
Money market deposits 246,431 - - - 246,431
Certificates of deposit 80,272 337,384 590,759 143,535 1,151,950
- -----------------------------------------------------------------------------------------------------
Total deposits 351,519 337,384 590,759 143,535 1,423,197
- -----------------------------------------------------------------------------------------------------
FHLB advances 23,500 - - - 23,500
Debentures and mortgage note payable (1) 3,500 2,500 89,892 52,190 148,082
Accrued interest on all borrowed funds (1) 3,437 - 3,099 362 6,898
- -----------------------------------------------------------------------------------------------------
Total borrowed funds 30,437 2,500 92,991 52,552 178,480
- -----------------------------------------------------------------------------------------------------
Total rate-sensitive liabilities $381,956 $339,884 $ 683,750 $ 196,087 $1,601,677
- -----------------------------------------------------------------------------------------------------
GAP (repricing differences) $265,673 $185,834 $(178,423) $(107,092) $ 165,992
- -----------------------------------------------------------------------------------------------------
Cumulative GAP $265,673 $451,507 $ 273,084 $ 165,992 $ 165,992
- -----------------------------------------------------------------------------------------------------
Cumulative GAP to total assets 14.8% 25.2% 15.3% 9.3% 9.3%
- -----------------------------------------------------------------------------------------------------
<FN>
Significant assumptions used in preparing the preceding gap table follow:
(1) Floating-rate loans and debentures payable are included in the period in
which their interest rates are next scheduled to adjust rather than in the
period in which they mature. Fixed-rate loans and debentures payable are
scheduled, including repayments, according to their contractual maturities.
Deferred loan fees are excluded from this analysis.
(2) Securities are scheduled according to the earlier of their contractual
maturity or the date in which the interest rate is scheduled to increase. The
effects of possible prepayments that may result from the issuer's right to call
a security before its contractual maturity date are not considered.
(3) Interest checking, savings and money market deposits are regarded as readily
accessible withdrawable accounts; and certificates of deposit are scheduled
through their maturity dates.
29
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
interest rates. The Company has not engaged in and accordingly has no risk
related to trading accounts, commodities, foreign exchange, hedging activities,
interest rate derivatives or interest rate swaps. The Company's market risk
arises primarily from interest rate risk inherent in its lending and
deposit-taking activities, and the issuance of its debentures. The measurement
of market risk associated with financial instruments is meaningful only when all
related and offsetting on-and off-balance sheet transactions are aggregated, and
the resulting net positions are identified. Disclosures about the fair value of
financial instruments as of December 31, 2005, which reflect changes in market
prices and rates, can be found in note 20 to the consolidated financial
statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2005. Management believes that there have been no significant
changes in the Company's market risk exposure since December 31, 2005.
Management actively monitors and manages the Company's interest rate risk
exposure. The primary objective in managing interest rate risk is to limit,
within its established guidelines, the adverse impact of changes in interest
rates on the Company's net interest income and capital. For a further
discussion, see the section entitled "Asset and Liability Management" under Item
2 of this report.
ITEM 4. CONTROLS AND PROCEDURES
The Company's management evaluated, with the participation of its Principal
Executive and Financial Officers, the effectiveness of the Company's disclosure
controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the
Securities Exchange Act of 1934) as of the end of the period covered by this
report. Based on such evaluation, the Principal Executive and Financial Officers
have concluded that the Company's disclosure controls and procedures are
designed to ensure that information required to be disclosed in the reports the
Company files or furnishes under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and regulations, and are operating in an effective manner.
The Company made no significant changes in its internal controls over financial
reporting or in other factors that could significantly affect these controls
subsequent to March 31, 2006.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 1A. RISK FACTORS
The Company's business is affected by a number of factors, including but not
limited to the impact of: interest rates; loan demand; loan concentrations; loan
prepayments; dependence on brokers and other sources for new loan referrals,
ability to raise funds for investment; competition; general or local economic
conditions; credit risk and the related adequacy of the allowance for loan
losses; terrorist acts; natural disasters; armed conflicts; environmental
liabilities, regulatory supervision and regulation and costs thereof; dependence
on a limited number of key personnel; and voting control held by a limited
number of stockholders who are also executive officers and directors.
This Item 1A requires disclosure of any material changes from risk factors
previously disclosed in the Company's most recent Form 10-K. There have been no
material changes to the Company's risk factors disclosed in the "Risk Factors"
section of the Company's Annual Report on Form 10-K for the year ended December
31, 2005, where such factors are discussed on pages 22 through 26.
``
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
30
ITEM 6. EXHIBITS
The following exhibits are filed as part of this report.
31.0 Certification of the principal executive officer pursuant to Section 302 of
The Sarbanes-Oxley Act of 2002.
31.1 Certification of the principal financial officer pursuant to Section 302 of
The Sarbanes-Oxley Act of 2002.
32.0 Certification of the principal executive and financial officers pursuant to
Section 906 of The Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
INTERVEST BANCSHARES CORPORATION
--------------------------------
(Registrant)
Date: April 27, 2006 By: /s/ Jerome Dansker
-------------------------
Jerome Dansker, Chairman and Executive
Vice President
(Principal Executive Officer)
Date: April 27, 2006 By: /s/ Lowell S. Dansker
----------------------------
Lowell S. Dansker, Vice Chairman,
President and Treasurer
(Principal Financial Officer)
31